[Dain Bosworth on WSTL:]
ú CAP is Here, But Will Customers Buy it? Westell's CAP. . . technology has been the pioneer in ADSL technology. It is relatively cheap, more reliable than its competitors and has been through several generations of chipset development. ***It also is subject to glaring weaknesses, however, including a lack of standardization and vulnerability to electrical interference.*** The coming year should be crucial for CAP, and though Westell has offered to provide ADSL solutions based on the DMT standard ***controlled by Amati,*** a definitive rejection of CAP would be a major blow.
ú An Early Market Share Winner, But Richly Valued. Westell has built powerful relationships with carriers, most notably Bell Atlantic Corp, a continuing booster of CAP. Its close relationship with Paradyne Corp, a recent spinoff of Lucent Corp, is a double-edged sword that underscores the proprietary nature of CAP technology. Westell's stock price is discounting an optimistic scenario for both the industry and the company, and as such we regard the company as the most richly valued of the U.S.-based ADSL pure plays.
ú Uncertainties Now Dominate. Before we can recommend purchasing the stocks of ADSL vendors, we need more evidence that key technology development and market acceptance milestones have been met. This sort of progress, in turn, should yield earnings estimates and price targets in which we can place enough confidence to justify Buy recommendations.
As the first entrant into a potentially large market for leading edge technology, Westell has the most to gain, and the most to lose, from ADSL technology. The company's CAP has the advantage of being relatively cheap and technologically more mature, but its chief competitor --- DMT--- is standardized, available from several vendors and was recently selected by several important RBOCs. We regard Westell as the most richly valued of the ADSL companies relative to the medium-term potential of the market for this technology, and thus the riskiest name in the group.
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An early pioneer in ADSL, Westell is acknowledged throughout the ADSL industry as having forged strong relationships with telecommunications providers, ***although its perceived first-entrant advantage was seriously damaged by the RBOC not in favor of DMT.*** As a result, Westell announced that it, too, would provide DMT-based ADSL solutions to those customers that prefer it---****to be supplied by Motorola Corp, a licensee of Amati Communications Corp. ****
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"We have projected a significant ramp-up in Westell's sales of ADSL equipment beginning in mid-calendar 1997---fiscale 1998 for this company---but we have a weak level of confidence in that forecast. An important guidepost will be an assessment of whether or not the company can attain significant share of a large and rapidly growing market late in this decade and early in the next. As the company with the highest market capitalization of the independent ADSL vendors, Westell's stock price---even at levels far lower than its heyday in 1996---is discounting a significant share of a vibrant market.
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